U.S. Growth and Employment Data Tell Different Stories

Job applicants at a hiring event for military veterans in Washington earlier this month. Hiring, driven by the services sector, remains strong in the United States.Credit
Gary Cameron/Reuters

Think of it as the looking-glass economy.

The stock market has been sinking since the beginning of the year and oil prices have plummeted, yet auto sales are at record highs and Federal Reserve officials are expressing confidence that the economy is on the upswing.

Bidding wars are breaking out for sought-after hires in software and technology even as corporate behemoths like DuPont, BP and Morgan Stanley disclose plans to lay off tens of thousands.

Measured by traditional yardsticks for growth, like gross domestic product, the American economy definitely looks weak. View it through the prism of hiring and employment, however, and the economy seems surprisingly strong.

“It is a real mystery how you can have nearly 300,000 new jobs created in December with the economy growing by 1 percent or less,” said Torsten Slok, chief international economist for Deutsche Bank Securities in New York. “We can’t have this discrepancy for a long period of time.”

The divergence in the data is not just a puzzle for Wall Street. With the 2016 presidential candidates about to face their first test with voters, the split is also shaping the campaign debate of Democrats and Republicans alike.

President Obama’s rosy take on the economy in his State of the Union address relied largely on the fact that hiring over the last two years was the healthiest it has been since the late-1990s boom. But the bleak mirror image presented in the Republican debate last week is also based on some hard-to-dismiss economic data: The proportion of Americans in the labor force is the lowest since the 1970s, and wage gains for most workers in the recovery have been scant.

The explanation for this dissonance may lie at least in part in the changing nature of the American economy.

Indeed, a crucial cause of the split is that the sectors that have been hardest hit — manufacturing and energy production — nowadays count for much less in terms of employment than they do in output.

The nation’s vast array of service industries, which are more labor-intensive, are actually doing far better, said Laura Rosner, senior United States economist at BNP Paribas.

And the thriving, domestically driven sectors like restaurants, health care, and professional and business services are serving as a firewall protecting the American economy from growing turbulence overseas.

“We are predominantly a services economy,” Ms. Rosner said. “In 2016, the test will be how service industries fare, and if hiring holds up.”

Last year, employment in services, which account for 86 percent of the American work force, jumped by more than 2.3 million, according to Bureau of Labor Statistics data. Manufacturing, which accounts for a mere 9 percent of employment these days, experienced an increase of just 13,000 jobs.

Given the recent numbers for hiring, said Michael Gapen of Barclays, the job market appears to be fundamentally sound. For those seeking to discern the future direction of the economy, he added, “labor markets have sent the better signal.”

And according to those in a position to know, like Tom Gimbel, a Chicago recruiter, demand for new workers remains brisk.

“I’ve got more open job orders than I’ve had in a long, long time,” Mr. Gimbel said. His staffing company, LaSalle Network, places workers ranging from operators in call centers who hold just a high school diploma to specialists like accountants and engineers with salaries in the six figures.

Small to medium companies, in particular, are providing the growth. “It’s a tale of two cities,” Mr. Gimbel said. “With big companies being more cautious, there’s an opportunity for smaller firms to hire and take market share.”

Slow Growth, Healthy Hiring

Payroll numbers were up strongly in October, November and December, while G.D.P. is estimated to have barely grown at all in the fourth quarter of 2015. One reason may be that the economy’s weakest sectors, including energy and manufacturing, account for a bigger hit to output than employment.

JOBS

Monthly net change in

nonfarm payrolls.

400

thousand

DEC. ’15

+292,000 jobs

300

200

100

0

’14

’15

GROSS DOMESTIC PRODUCT

Annual rate of change in the G.D.P., based on quarterly figures adjusted for inflation and seasonal fluctuations.

Nationally, in December alone employers increased payrolls by 292,000, the Labor Department reported this month, well above what Wall Street had expected. That kind of employment gain is an important reason more optimistic forecasters like Mr. Gapen believe the economy is not nearly as bad as the modest G.D.P. numbers would suggest.

Overall growth last year was dragged down by weakness in trade and the factory sector, reflecting the sting of the strong dollar on exporters and softness in key markets like Europe and China, Mr. Gapen said.

The plunge in oil prices, meanwhile, has meant a reduction in drilling activity and capital expenditures by energy companies in the United States, further crimping output as measured by G.D.P. That has hit the economy even though cheaper gasoline and heating oil are delivering a big bonus to ordinary consumers.

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Warmer than normal temperatures in many parts of the country in the fall also meant utilities burned less oil, coal and natural gas to heat homes, with homeowners also spending less. That’s another economic positive, but it translates into a headwind once the numbers are crunched.

“Consumption was likely held back by transitory factors,” Mr. Gapen said. Based on the data reported so far, he estimates the economy expanded by a mere 0.3 percentage point in the fourth quarter of 2015, even worse than the anemic 0.6 percentage point gain recorded in the first quarter of last year.

In a parallel to the broader split, Ms. Rosner of BNP Paribas does not think the economy grew at all last quarter — but she thinks it could actually pick up momentum and expand faster than expected in the first half of 2016.

“The resources are there to support more consumer spending because of hiring,” she said.

To be sure, some experts are not convinced that healthy payroll increases necessarily portend faster growth, arguing that the economy is on very shaky ground.

“People commonly use employment as a leading indicator,” said David A. Levy, a veteran independent economist in Mount Kisco, N.Y., “but it’s a lagging indicator.”

Mr. Levy said the optimists were underestimating just how big the impact from weakness overseas will be.

“The U.S. economy is going to be pulled into a recession for the first time since World War II by overseas events,” he said. “Emerging markets, including China, are this cycle’s housing bubble.”

No matter who is right about this year, another conundrum faces economists looking at long-term trends. Experts like Mr. Slok at Deutsche Bank are concerned that weak productivity growth may lift hiring now but ultimately undermine future prosperity.

At many companies, there is not much room left to cut costs or improve efficiency, but executives remain hesitant about investing heavily in new machines and technology that would increase output. That means adding more workers, he explained.

While that is certainly beneficial for employment, without productivity gains the economy’s real potential will continue to go unrealized.

With the annual pace of growth in the current recovery averaging 2 percent — well below the trajectory of past expansions — and future projections not looking much better, some prominent economists say the United States has settled into a lengthy period of what they term “secular stagnation.”

The surge in hiring late last year could be a sign that the American economy has better days ahead. But no one says it’s a sure thing.

“Having 300,000 more consumers last month is unambiguously good news for the U.S. economy,” Mr. Slok said. “But I’ve argued for several years that we haven’t been in secular stagnation and I’ve been wrong.”

Despite a few prominent pockets of weakness, like manufacturing or energy industry investment, demand for the services that consumers want remains healthy, and that ultimately is what now drives the American economy, said Drew T. Matus, an economist at UBS Securities.

“Exports look worse and demand for goods is volatile but services are holding up,” Mr. Matus said. “If people aren’t worried about buying a coffee or going to the doctor or the barbershop, there’s less of a reason to worry.”

A version of this article appears in print on January 18, 2016, on Page B1 of the New York edition with the headline: U.S. Growth and Employment Data Tell Different Stories. Order Reprints|Today's Paper|Subscribe